Merger to Form a Partnership (Cambridge International A-Level Accounting)

Spec point — how to prepare journal entries and make entries in the relevant ledger accounts to record the: – merger of two or more sole trader businesses to form a partnership or a limited company – merger of a sole trader’s business with an existing partnership to form a new partnership

Merger to form a partnership

• A sole trader might merge with other sole traders or an existing partnership to form a partnership
• This is very similar to when a partnership introduces a new partner

How do I make journal entries when a sole trader merges with an existing partnership?

• STEP 1 Calculate the net profit or loss on revaluation for the existing partnership using the old ratio and the profit or loss on revaluation for the sole trader

  • If it is a profit

    • Debit the revaluation account
    • Credit the capital accounts

  • If it is a loss

    • Debit the capital accounts
    • Credit the revaluation account

• STEP 2 Calculate the share of the raised goodwill for the partners in the partnership using the old profit-sharing ratio and the goodwill of the sole trader's business

  • Debit the goodwill account
  • Credit the **capital **accounts

• STEP 3 Calculate the share of the** eliminated goodwill** for each of the current partners (including the new partner) using the new ratio

  • Debit the capital accounts
  • Credit the goodwill account

• STEP 4 Calculate the new capital balances for all the partners

  • Balance the accounts
  • Any partner might decide to introduce more capital to the new partnership

How do I make journal entries when sole traders merge to form a partnership?

• The process is very similar to merging with an existing partnership
• The goodwill does not need to be shared between the sole traders when it is raised
• However, the total goodwill needs to be shared between the partners in their agreed profit-sharing ratio when it is written off

Worked Example Ali and Ben had been in partnership for several years, sharing profits and losses in the ratio of 3:2. On 1 January 2026, they merged their business with Chloe’s sole trading business to form a new partnership.

The statements of financial position at 31 December 2025 for both businesses were as follows:

	Ali and Ben $**	Chloe $
Non-current assets
Property, plant and equipment	240 000	100 000
Current assets
Inventory	40 000	20 000
Trade receivables	60 000	30 000
Cash at bank	15 000	10 000
	115 000	60 000
Total assets	355 000	160 000
Capital accounts		130 000
Ali	180 000
Ben	120 000
	300 000
Current liabilities
Trade payables	55 000	30 000
Total capital and liabilities	355 000	160 000

The following arrangements were agreed upon for the new partnership:

1. The new profit and loss sharing ratio would be Ali 40%, Ben 30%, and Chloe 30%.
2. Goodwill was to be valued at two times the average profits of the last three years. The profits for the last three years were:

	Ali and Ben $	Chloe $
2025	90 000	30 000
2024	80 000	25 000
2023	70 000	20 000

1. No goodwill account is to be kept in the books of the new business.

2. All tangible assets and liabilities were to be taken over at their book values, with the following exceptions:

• Ali and Ben:

  • Property, plant and equipment revalued to $270 000
  • Inventory revalued to $35 000

• Chloe:

  • Property, plant and equipment revalued to $120 000
  • Inventory revalued to $18 000

Complete a statement to calculate the capital account balance of each partner in the new partnership at 1 January 2026.

	Ali $	Ben **$	Chloe $
Balance at 31 December 2025	180 000	120 000	130 000

Answer:

Calculate the value of goodwill for Ali and Ben

2 \times \frac{( \ 70 000 + $ 80 000 + $ 90 000 )}{3} = $ 160 000$

Calculate the value of goodwill for Chloe

2 \times \frac{( \ 20 000 + $ 25 000 + $ 30 000 )}{3} = $ 50 000$

Share the goodwill in the old ratio between Ali and Ben

Ali: \frac{3}{5} \times \ 160 000 = $ 96 000$

Ben: \frac{2}{5} \times \ 160 000 = $ 64 000$

Calculate the total goodwill

\ 160 000 + $ 50 000 = $ 210 000$

Share the goodwill in the new ratio between Ali, Ben and Chloe

Ali: 40 \% \times \ 210 000 = $ 84 000$

Ben: 30 \% \times \ 210 000 = $ 63 000$

Chloe: 30 \% \times \ 210 000 = $ 63 000$

Calculate the net profit or loss on revaluation for Ali and Ben

		$
Increase in property plant and equipment	$270 000 - $240 000	30 000
Decrease in inventory	$35 000 - $40 000	(5 000)
Profit on revaluation		25 000

Share this in the old ratio

Ali: \frac{3}{5} \times \ 25 000 = $ 15 000$

Ben: \frac{2}{5} \times \ 25 000 = $ 10 000$

Calculate the net profit or loss on revaluation for Chloe

		$
Increase in property plant and equipment	$120 000 - $100 000	20 000
Decrease in inventory	$18 000 - $20 000	(2 000)
Profit on revaluation		18 000

Calculate the capital account balances

	Ali $**	Ben **$	Chloe $
Balance at 31 December 2025	180 000	120 000	130 000
Add: Goodwill raised	96 000	64 000	50 000
Add: Profit on revaluation	15 000	10 000	18 000
Less: Goodwill eliminated	(84 000)	(63 000)	(63 000)
Balance at 1 January 2026	207 000	131 000	135 000